An exercise of tax legislation?

The Bureau of Internal Revenue (BIR) has recently issued Revenue Memorandum Circular (RMC) No. 46-2014 clarifying the taxability of financial lease for purposes of Documentary Stamp Tax (DST). 

According to the RMC:

“Although documents, transactions or arrangement under financial lease are not specifically mentioned under section 179 of the NIRC, as amended, it should be remembered that the imposition of the DST under such section of the NIRC, as amended covers all debt instruments. Therefore, being a nature of an obligation, financial lease is covered under such section of the NIRC, as amended.”

“Accordingly, any document, transaction or arrangement entered into under financial lease is subject to the Documentary Stamp Tax (DST) under Section 179 of the National Internal Revenue Code, as amended.”

What are the bases used by the BIR in pronouncing that a financial lease is subject to DST under Section 179 of the Tax Code?

According to the RMC, financial leasing is a mode of extending credit. It cites Republic Act (RA) No. 5980 as amended by RA No. 8556, otherwise known as the “Financing Company Act of 1998”, which defines financial leasing as a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70 percent of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

The RMC also cites Section 3(c) of the Financing Company Act of 1998 which defines the term “credit” to mean any loan, mortgage, financial lease, deed of trust, advance or discount, conditional sales contract, contract to sell or sale or contract of sale of property or service, either for present or future delivery, under which, part of all or the price is payable subsequent to the making of such sale or contract.

Furthermore, the RMC considers financial lease as not only akin to an obligation by definition but also by treatment, making reference to the International Accounting Standards (IAS) No.17 on Leases on how finance lease should be treated and recognized.  IAS 17 requires that a liability account be set up in the lessee’s books of accounts in order to reflect the correct economic resources and obligations of an entity.

Affected taxpayers, however, found the above justifications not very convincing.

Although the RMC made reference to various statutory definitions, IAS and the Tax Code itself, none of these fully elucidated why financial lease is more of an obligation rather than its real nature which is lease. We note that a financial lease is still covered in definition of lease under the Civil Code.  In fact, in the case of Beltran vs. PAIC Finance Corporation, G.R. No. 83113 promulgated on May 19, 1992, the Supreme Court discussed that there are two types of leases – namely operating lease and financial lease, implying that financial lease is indeed a lease.

Also, while a perusal of Section 179 would clearly show that enumeration of debt instruments is not exclusive, the instruments contemplated therein are those which represent borrowing and lending transactions. It is to be noted that there is a clear debtor-creditor relationship between the parties covered by the debt instruments enumerated in Section 179 of the Tax Code.  Such relationship is not clear in a financial lease. Quite the contrary, the Supreme Court has declared in the aforecited Beltran case that a financial lease is a form of lease.

Well-settled is the rule that the power to tax is the exclusive prerogative of Congress. Thus, while the commissioner has the exclusive power to interpret the provisions of the Tax Code and other tax law, the commissioner cannot infringe on such legislative prerogative or make an issuance that go beyond the terms and provisions of the tax law it sought to interpret.

Whether the RMC infringed on the legislative prerogative is, however, a question that will have to be resolved by the courts.  Until a court of competent jurisdiction declares the RMC invalid, taxpayers have no other recourse but to consider the RMC subsisting and effective.

Emma F. Quinto is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.